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Debt-to-income ratio for mortgages

Unpacking one of the most important factors for getting the right mortgage.

Updated

Buying a new home is exciting, but the process can be confusing and filled with unfamiliar terms. Along the way, you will likely hear about your debt-to-income ratio (DTI) and how it can affect your qualification

Your DTI is the percentage of your monthly income devoted to paying debts. Mortgage lenders include this ratio to determine your ability to repay a loan.

What is the ideal debt-to-income ratio for a mortgage?

A low DTI means you have a good balance between debt and income, so a lower percentage increases your chances of approval. Lenders consider a DTI of 36% as a good ratio — with no more than 28% of that going toward your mortgage. The lower your DTI, the more competitive your mortgage rates will be.

How to calculate debt-to-income ratio for mortgages

Follow these instructions to calculate your DTI ratio:

  1. Enter the total monthly amount you pay toward your credit cards, car loans and mortgages.
  2. Add up your remaining monthly debt payments — such as student loans or line of credit — and enter the number under Other loan payments.
  3. Enter your monthly income.
  4. Click Calculate. You’ll see your DTI ratio to the right of the calculator with a brief description of what that means to your creditors and lenders.

DTI ratio for mortgages calculator

Calculate what percentage of your income is allotted to debt.

Your monthly debt payments
Credit card paymentsCar loan payments
$/ mo
$/ mo
Mortgage paymentsOther loan payments
$/ mo
$/ mo
Your monthly income
$

Fill out the form and click “Calculate” to see your DTI ratio.

Your debt-to-income ratio is %

What is the maximum debt-to-income ratio for mortgages?

In general, 43% is the maximum debt-to-income ratio that mortgage lenders accept. However, an ideal front-end ratio, or amount you spend on your mortgage, is 28% and 36% is ideal for a back-end ratio — what you spend on the rest of your bills.

Why is the DTI ratio so important for mortgages?

When lenders issue any type of loan, there’s always a risk of the borrower defaulting, so your interest rate is essentially a premium for the lender’s assumed risk. If you have a high DTI, it means that a good portion of your earnings already goes towards debts, which could affect your ability to make mortgage payments. Before your application is approved, lenders evaluate your DTI to determine your ability to repay the loan.

The five C’s of credit

Lenders may use the five C’s of credit to evaluate your application: capacity, capital, character, collateral and conditions. The DTI is a key part of this process, as it reflects each component of the evaluation:

1. Capacity. Since your DTI ratio reflects the amount of your income that goes toward debts, it demonstrates your ability — or capacity — to take on a mortgage.

    2. Capital. Otherwise known as a down payment, capital is the amount of money you’ve invested in the property. A low DTI ratio may allow you to make a larger down payment.

    3. Character. Your debt-to-income ratio shows your ability to save and use credit responsibly, which is a reflection of your character as a borrower.

    4. Collateral. If you have other properties or assets it shows the lender you have collateral.

    5. Conditions. The principal and interest rate of your loan affect your chances of approval. A low debt-to-income ratio may help you secure more favorable conditions.

    Types of debt-to-income ratios for mortgages

    There are two parts to calculating your DTI:

    • Front-end ratio: The percentage of income that goes toward housing costs. It’s calculated by dividing either your monthly rent or PITI — principal, interest, taxes and insurance — by your gross monthly income. Aim to keep this number under 28%.
    • Back-end ratio: The percentage of income that goes toward recurring debts — including rent or PITI — calculated by dividing the sum of all debts by your gross monthly income. Aim to keep this number under 36%
    Lenders look at both ratios when deciding your mortgage rate, but the back-end ratio is most important because it represents your total overall debt.

    Case study:

    For example, say you make $4,000 a month and spend $400 on a monthly car payment, $400 on your credit card bill and $800 on rent. This gives you a front-end DTI of 20% and a back-end ratio of 40%.

    There’s a good chance you would be approved for a qualified mortgage, but the rate you’ll get depends on your lender’s preference for a front- or back-end ratio. For example, your front-end ratio could fall under the 28% cutoff, but you might not get the best rate if your back-end ratio exceeds 36%.

    MUST READ: The qualified mortgage rule

    A qualified mortgage is a type of home loan that’s designed to be fair to borrowers. Lenders issuing this type of loan must meet certain requirements to ensure that you can afford to repay the mortgage.

    Some of these requirements include prohibiting certain risky loan features or excess points and fees. And most importantly, it ensures lenders don’t lend to you with a debt-to-income ratio below 43%. However, qualified mortgage requirements don’t apply if you’re eligible to purchase through Fannie Mae, Freddie Mac or the FHA.

    How can I improve my debt-to-income ratio?

    If you’re having trouble getting approved for a mortgage or simply want a better rate, there are a few ways to improve your DTI:

    • Pay off debt. The simplest way to lower your DTI is to reduce your debt. You can do this by paying down your current debts faster — which will raise your DTI initially, but significantly reduce it in the long run.
    • Postpone large purchases. If you know you’ll be applying for a mortgage soon, try to postpone any large purchases, as they’ll increase your DTI.
    • Refinancing. Refinancing high-interest debts reduces your interest rate, meaning more of your money goes towards the principal and the debt will be paid off sooner.
    • Increase your income. A part-time job, pay raise, or any other increase to your monthly earnings reduces your debt relative to your income.
    • Consolidate. If you have debts, consider consolidating to reduce your monthly minimum payment.

    Don’t apply if your DTI is high

    Your DTI is the most important factor when determining your mortgage rate — but your credit score and other expenses matter, too. DTI calculations don’t include monthly obligations such as insurance and utility payments, or food and entertainment costs. A high DTI could mean struggling to cover your mortgage payments and monthly expenses. So wait until your have a lower DTI ratio to get a good rae and avoid taking out a loan you can’t afford.

    Bottom line

    Your debt-to-income ratio is an essential measure that lenders consider when you apply for a mortgage. Whether you’re currently home shopping or preparing for the future, use the DTI calculator to find out where you stand.

    Once you’re ready to apply, shop around and compare home loans to find the best option for your situation.

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